For Sharon Ruffles, head of fixed income trading for EMEA and Asia Pacific at State Street Global Advisors, the beauty of fixed income lies in how much one day can vary from the next. Something that has become only too apparent throughout the course of 2023.
Events from the last three years have translated otherwise dormant interest rates into a hive of activity for fixed income traders as global economies work to combat the threat of inflation and recession. A novel concept to greener traders.
Beginning her career on the buy-side at boutique asset manager Credit Suisse First Boston as an investment portfolio analyst in London in 1986, Ruffles has seen the markets through several highs and lows. Her early role gave her a grounding in how the asset management world works, sitting between the traders and portfolio managers to analyse performance and analytics. She began her trading career on an all-female trading desk, and says it was watching the world’s news play out in the markets that drew her to trading.
“I loved the idea that I could interpret what was going on in the real world and then see how the markets reacted to that,” she says. “The changing face of it every day. I still love it. It is a different job every day. As much as it’s the same desk, same people and same screens, what is on those screens and what’s happening is different. I’ve been in the industry long enough to see some of the pits and the rises and falls of interest rates, a lot of people haven’t yet.”
Ruffles has been with State Street Global Advisors, an institution she affectionately describes as homely, for 19 years. Heading up fixed income trading from 2004 onwards, the trading team has grown from two to five dedicated London-based fixed income traders under her stewardship and covers everything from government and investment grade credit bonds to convertible and emerging market bonds and derivative products.
Expect the unexpected
The last few years have had a transformative effect on fixed income. Black swan events such as the global pandemic and the invasion of Ukraine have sparked a chain of events that have led to macroeconomic disarray across most of the globe all on the backdrop of significant technological advancement as volumes move on-venue.
During the final weeks of July and first week of August, the European Central Bank, the US Federal Reserve and the Bank of England all opted for further rate hikes. The decisions have set the stage for unprecedented levels of activity in fixed income which has seen otherwise subdued fluctuation in rates globally in recent years. For Ruffles, the divergence of economies globally is what fixed income traders must pay most attention to going forward.
“We know that the UK inflation has been sticky. We’re starting to think about the divergence of economies now,” says Ruffles. “While we’ve been in a rate rising world globally, I think we’re about to enter into the paradigm of some countries reaching their terminal rate. It might not be that they stay there forever but they’ll stay there just to see how the rate increases have embedded into the economy and what impact they’ve had.
“We’re constantly on the lookout for what could move markets and therefore what could impact a trade. It’s knowing what to expect and then expecting the unexpected.”
The hunt for liquidity
Liquidity is already typically more fragmented in fixed income – no new story there – and the macroeconomic activity from the past few years has re-stressed the need for participants to ensure strong relationships with counterparties while also diversifying their liquidity sources in times of stress.
Some counterparties are less able to warehouse risk and inventory to the same extent as they were before and this has led many buy-side shops, including State Street Global Advisors, to assess new ways of finding liquidity.
“We’re looking for market makers to risk price for us,” Ruffles explains. “Those relationships that we have with our counterparties are really important in order for us to make sure that we’re able to access good prices and liquidity.
“However, sometimes it’s a bit like retail shopping. You go into the shop and they don’t have the sizes that you want anymore but you can get it online. It’s that evolution that has happened. The sell-side sometimes don’t have the inventory that we need and therefore we need to find some different ways of addressing and finding that liquidity.”
Technology at its heart
Already on an accelerated path to electronification, this drive to source new liquidity has fuelled new technology developments in fixed income as heads of trading increasingly move to add execution management systems (EMS), portfolio trading and all-to-all trading to their stable when it comes to execution.
“The idea that one tool does not fit everything is becoming so much more apparent because liquidity is so much more scattered around the market,” Ruffles explains. “When I joined State Street in 2004, we were electronically trading then.
“In Europe, for our style of business we don’t use portfolio trading that much. When we evaluated the tool versus doing it ourselves we tended to evaluate that our results would be better than the results we would get from the portfolio trade. If we’re looking at European IG for example, the dispersion of where those bonds are held and where the availability is would mean that if I can go and get those forms from XYZ rather than just going to one person I’m possibly going to pick off some better pricing. But having said that our North American desk embrace portfolio trading much more.
“We’ve always been a really big proponent of electronic trading. We don’t like to give away all of our trade secrets but we do like to make sure that we’re engaging closely with the MTFs and the vendors to make sure that they’re developing along the lines that can be useful not just to us but to the broader street.”
Formerly an entirely over-the-counter market, a growing portion of fixed income volumes in smaller size now take place on trading platforms. These incumbent trading venues have been central to much of the technological evolution in fixed income as they jostle to remain at the heart of execution.
Challenger venues have attempted to come to market as of late in the pursuit of share gain on the back of complaints that the current system is monopolised by those aforementioned incumbent venues – most recent was distributed ledger technology based LedgerEdge. However, on the eve of sitting down with Ruffles, the start-up bond trading platform confirmed it was closing down just three years after its establishment due to “an extremely challenging funding environment”.
“It’s a shame that they’ve gone. It does show how difficult it is for a new vendor to break into the market,” says Ruffles. “There are vendors that are breaking into the market for different asset classes and working out where the gaps are. Very often the incumbents are better positioned to fill those gaps, highlighting the difficulty of breaking into this space.”
Also set to potentially disrupt the incumbent execution landscape is the prospect of direct connectivity – whereby buy-side shops develop direct pipes with a more limited number of liquidity providers. One way of doing this is by using an execution management system (EMS). EMS are as widely adopted in fixed income as they are in equities, namely because the systems have not typically lent themselves to buy-side workflows, particularly with regards to bonds. However, in the pursuit of better liquidity from new sources, Ruffles explains, direct connectivity could spark increased appetite for EMS from the buy-side.
“At the moment, RFQ is a standardised protocol and that’s useful for all of these platforms but as we try to address liquidity in different ways we will be looking for different protocols,” explains Ruffles.
“That might be direct connectivity to some of our banks and in which case that can be quite burdensome for the order management system (OMS). That might be a situation where you would look to use an EMS to give you that connectivity so that you’re not slowing down your OMS by putting lots of different connections in. You want it to be robust and speedy but equally you might want those connections to go out of the door in a different way directly to the bank.”
The most poignant technological evolution to have hit the fixed income market in recent years is the introduction of data-driven composite pricing available on trading platforms, Ruffles explains, bringing artificial intelligence (AI) to fixed income for the first time. Several AI-focused initiatives – in particular those related to liquidity analysis and sourcing – have been brought to market in recent months as available data sets have expanded.
“To a certain extent we’re already using AI. Composite+ is taking in streaming prices and historical prices and it’s overlaying the positive factors and then it’s putting a predictor in there,” Ruffles explains. “Then it’s coming up with a ‘composite price’.”
“That’s probably been the biggest evolution. When I first started trading, I would be picking up the phone and asking people for prices. The best I had to go by would be maybe where I last traded a bond and then potentially some information on Bloomberg. We’ve gone from that point to today where most bonds have got a liquidity score that we can look up some of these MTFs. We can see those streaming prices contributing to the composite pricing. What AI can’t do in finance, any more than a human can do, is predict the future.”
Automation for scale
For an institution the size of State Street Global Advisors, electronification and automation are essential for them to continue to trade at the scale that they currently do. When Ruffles joined SSGA she sat on a desk of two. She now runs a desk of five in London and two in Singapore. SSGA’s trading headcount now totals 37 with desks across asset classes in Hong Kong, Boston and its newest desk in Singapore set up in 2021.
“Would trading desks be bigger if we didn’t have the electronic trading platforms?” asks Ruffles. “Absolutely yes. However, our day-to-day trading volume is fairly significant. We trade on average about 500 trades a day just for the EMEA desk. On our last business day, that multiplies by 10 taking it to 5,000 but with the same amount of people. It gives you a sense of what the systems enable us to scale.”
Venues will now likely turn their attention to building out the electronification of blocks in fixed income, Ruffles says, but caution must be used to ensure information leakage is minimised. Smaller sized tickets have made their way onto venues but a big portion of fixed income trading still happens bilaterally, particularly in larger sized orders.
“There are larger tickets that are still being traded by voice. If you’re a vendor or an MTF it would be natural to say since Covid and the advent of electronic trading in smaller size what’s the next thing I go for?” Ruffles says.
“They’ll likely want to get more of that bigger size ticket business. But in reality how much bigger size ticket business is there to do and how are we trading today? You can only trade a block if there’s a block available to trade so sometimes conversations still need to happen in order to work out where that that liquidity is and where that size is. How do you negotiate that without revealing too much about the trade on an electronic platform without moving the market away from you?”
SSGA has been building out its emerging markets hard currency and local book of business as of late, and Ruffles highlights that many of these markets vary in their use of electronic trading, maintaining the need for skillsets in voice trading on the trading desk as well as an understanding of electronic trading solutions.
“For a lot of those markets, they either don’t trade electronically or they’ll trade in much smaller size electronically. The size becomes a lot more significant in terms of how people will price if you’re too free with the information,” she says. “To that extent, a large volume of our trades will still be executed by voice in order to prevent information leakage, which could negatively impact our ability to efficiently execute certain trades.”
The constantly shifting macroeconomic backdrop after years of Covid-fuelled turmoil is acting as a catalyst for change in fixed income. Traders like SSGA’s Ruffles thrive in this environment. Which is lucky, because it looks as though change is here to stay.